What is intermediation?

The literal meaning of intermediation is “coming in between”, “a link” or a “third party”. In the
financial markets where lending and borrowing takes place almost all the time, intermediation
has a greater importance. When there is a third part a bank or any financial institution is
involved in the lending and borrowing of money it is called intermediation. This process
minimizes risk. We can take an example of the derivative market where the forward contracts
are based on buying and selling of shares among two parties whereas a future contract is a
forward contract with intermediation, like stock exchange is involved in the process – takes an
initial margin from the buyer to recover the losses in the future. However, there are many
examples of financial intermediation and even intermediation in our daily lives. Brokers and
real estate can also be an example, when we rent or buy a house a broker is involved to make
the process smooth and reliable.